Good day, everyone, and welcome to the Verra Mobility Third Quarter 2020 Financial Results Conference Call. Today’s conference is being recorded. And at this time, I’d like to turn the conference over to Marc Griffin. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Verra Mobility’s third quarter 2020 earnings call. Today, we’ll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is David Roberts, Verra Mobility’s Chief Executive Officer; and Tricia Chiodo, our Chief Financial Officer. They’ll begin with prepared remarks, and then we’ll open up the call for Q&A. During the call, we’ll make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other factors that could affect our actual results, please refer to those contained in our Annual Report on Form 10-K or our quarterly report on Form 10-Q, which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC’s website at sec.gov. Finally, during today’s call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the press release issued after the market closed today, which is located again on our website at ir.verramobility.com and the SEC’s website at sec.gov. With that, let me turn the call over to David.

Yes. Thanks, Marc, and thank you to everyone joining us on the call today. As you are all aware, the global pandemic continues to evolve. And while we believe we are most likely through the worst of it, the residual effects on part of our business are still present. Our third quarter performance showed modest signs of improvement in our Commercial Services segment, continued strength in our Government Solutions segment and was highlighted by a return to profitability, strong cash generation and EBITDA margin levels that are consistent with our historical average. Overall, the trends across the business during the quarter were similar to what we experienced in the latter part of the second quarter. That said, signs of optimism are appearing as travel-related activity continued to trend up throughout the quarter, a good sign for tolling activity in our Commercial Services segment as well as for variable rate photo enforcement in our Government Solutions segment. While it is too early to tell if this trend will continue, we are certainly encouraged by the upward trajectory. While our business is facing extreme challenges like most of the global economy, we continue to believe we have built a highly resilient business that has incredible upside. Moreover, our ongoing commitment to serving our customers at the highest point of their need alongside strong fiscal discipline, helped deliver Q3 results that were above our internal plan. Third quarter revenue came in at $96.9 million, and our adjusted EBITDA came in at $53.5 million or 55% of revenue. As we described in detail last quarter, we took aggressive action to rightsize our cost structure, and we were pleased to be able to return the business to profitability. Additionally, I would like to highlight that we ended the quarter with $129.2 million of cash on…

Thanks, David, and good afternoon, everyone. I’ll provide a more detailed overview of our third quarter financial performance, and then we’ll open up the call for questions. We’ve provided a short earnings deck on our website that provides some insights into the quarter and has some reconciliations from GAAP to the non-GAAP results. If you’re following along in the earnings deck, I’m on Slide 2, which outlines revenue and adjusted EBITDA performance for our Commercial Services segment. Total revenue for this segment declined 43% to $44.2 million in the third quarter of 2020 from $77.6 million in the same quarter of the prior year. This business segment derives the majority of its revenue from tolling services provided to rental car companies, which continue to feel the effects of reduced travel due to COVID-19. Although, we are still experiencing the impact of COVID-19 on the underlying industries we serve, you can see from the graph on Slide 2 that we have seen increasing month-over-month revenue from April through September. The revenue for September of $16.2 million was more than double the revenue at the April trough. In response to the revenue decline, we took decisive actions to reduce costs, decreasing operating expenses and SG&A by $10.5 million in Q3 of 2020 compared to the same quarter in the prior year. There are two discrete items that impact Commercial Services results in the quarter. As you may recall, last quarter, we reserved nearly $3 million in credit losses associated with the Hertz bankruptcy. We’re happy to report that in October, we negotiated a pure amount with Hertz on the pre-petition receivables, whereby they assumed all our contracts and paid $7.8 million of the $9.5 million past-due receivable. The $1.7 million loss was lower than we anticipated, and the reversal of our credit…

[Operator Instructions] We’ll take our first question from Steven Wald with Morgan Stanley.

Great, thanks for taking my question and good evening. Maybe a good place to start is, Tricia, you sort of left off there talking about the trends coming into fourth quarter and expecting to be even with the seasonally stronger third quarter. I’m curious, you can’t provide specific guidance, but it sounds like you guys are using some internal work there and what you’re seeing in terms of – I guess, what mechanically drives that? Are we seeing an uptick or behavior shift toward rental cars? Are we seeing a gap out in our performance relative to the rental car industry? I know you were outperforming examples like Avis Budget? And so could you maybe talk us through how you’re thinking about that? And the potential for that to maybe not quite come to fruition if we have a second wave impact, how are you thinking about the sensitivity there?

Yes. So what we’re – what we’ve done is we’ve looked at those – we had a third party come out and sort of do their predictions of where rental car demand would come out in relation to airline, travel or revenue passenger miles. We’ve taken that along with the fact that, David said, we used that forecast for our Q3, and we over performed that. We’ve taken those trends in what we see our rental agreements from our customers to sort of get a look to what the next two months are really going to hold. And based on that, that’s where we’re coming out. When you think about the overall impact of COVID in closures, you see a lot of Europe closings, but not a lot of closures within the U.S., and we don’t think that that’s going to have a huge impact, at least, in the next two months in relation to that. We have done some analysis over sort of the top 25 airports and what they look like. And when we look at our adoption rate at the combined – the combination of those airports, it’s right around this sort of call it, 46 percentage mark, which we think is very strong and actually fairly consistent with where we were in 2019. So we’re holding our fair share of the rental agreements that are coming in. Our product is still being adopted at the same rate, which we view as positive.

Got it. Okay. That’s very helpful to hear. Maybe switching gears to the Government side. It sounds like you had some renewals, you had some incremental ones and you announced the upstate New York counties and pointed to the amount of school buses that, that affects. Any thoughts around some of the other – or I guess, where we’re trending in terms of states like Georgia? I think you guys had previously mentioned some parts of California looking at expanding their map in school zone, and I believe D.C. had passed a mandate, and I wasn’t sure if you guys were bidding for that. Or maybe just more generally, could you comment about what you’re seeing in terms of movement toward more cameras as states start to look at their budgets coming through the pandemic?

Yes. I don’t think we’re – really, our primary focus has been in Georgia and Virginia, which have the newer legislation related to school zone speed. I think what we’ve noticed is consistent with what we shared in the previous call, which is related to – the implementation of school zone speed is not the number one priority for these schools right now. Given the pandemic, they’re going to be continuing to focus on the safety of their kids, especially if there isn’t uptick in their particular area. And that we would anticipate that that’s going to keep things slower than we would like, probably until the first of the year.

Got it. Okay. That’s helpful. And if I could just squeeze in one quick one, one last one, on the margins. I know you mentioned that it was helped out a little bit by some of the timing or I guess, reversals on some of the receivables that were out of bad debt expense. Obviously, even without that, it would have been somewhat elevated relative to what I think it was back in sort of 2Q or where we were kind of troughing out. I’m just kind of curious how you’re thinking about the normalized margin here. Obviously, you took a lot of cost out of the business. But as you think about 4Q, that could be even to 3Q, are we sort of back toward thinking closer to the low 50s than the sort of 40 – low 40s range that it looked like at the worst of the pandemic condition?

Yes. So we’re – you’re talking company as a whole or the segment?

Yes, I’m speaking more on a consolidated basis.

Yes, if you think about on a year-to-date basis, that – really it’s only that one discrete item that matters, which was the settlement that we had for $2.8 million. That’s really only like 2 percentage points on the overall margin when you look at the year-to-date basis. So I would think from – I’m sorry, in the quarter. It’s at 2 percentage points in the quarter. So I think we could move out in the sort of 54% to 55% range as we move into the – fourth quarter would be – still be a strong result for us.

Great. I appreciate it. Thank you.

Thank you.

And we’ll move next to Dave Koning with Baird.

Yes. Hey, guys. Nice job. And I guess, first of all, when we look at the Commercial business, can you give us kind of a mix of Q3 revenue by the RACs and then the FMCs? And maybe how close did the RACs kind of mirror the PSA type volumes through the quarter and into October, just as we think of that segment?

So I think the – well, so the RACs are by far and away, the majority of the revenue that we have within that quarter. So they’re the strongest player within the Commercial Services segment. As we look, I think what we’re seeing is that we are still outperforming the underlying downturn in rental agreements that our customers are seeing, and that’s sort of bolstered up a wee bit from the FMC business that we have there as well. The FMC business is generally fairly a small percentage of our overall business.

Okay. No, that’s helpful. And then when we just think about the cost in the Commercial segment, it was about $14 million or something around there, which benefited obviously from the items. But when we look at Q4, like, if revenue is just flat sequentially, give or take, that $14 million goes up by how much? How much were those two items in total? Is that a good way just to think about just elevate expenses sequentially by those two items?

Yes. The two items. One of them was $2.8 million, one of them was closer to $1.5 million. So those two items would be not reflected in the cost structure again. One of them was in SG&A and the other one was in other income.

Okay.

Sorry, what was the other part of your question?

Well, I guess, is it fair – if in Commercial Services, if the reported expenses were about $14 million in sequentially, if revenue is flattish, let’s just say, give or take, I mean, does expenses just go from $14 million up by that $2.8 million that was in the segment? Like obviously, you don’t get the reversal again. So do we just move it up by that amount sequentially?

Yes, you could do that. I’m not expecting any other unusual items coming through in the cost structure.

Okay. Good. Well thanks and great job on cost.

Thank you.

Thank you.

And we’ll move next to Justine Forsythe from Credit Suisse.

Hey, David. Hey, Trish. How is it going?

Good.

Good, good. Glad to hear it. A couple for you here. So first one, I wanted to dig in a little deeper. And I know you mentioned, and I appreciate this that costs in the Government segment, especially related to speed has slowed due to schooling at home or hybrid, as you mentioned. But I just wanted to dig in a little bit more on the RFP process broadly and potential for new wins there kind of out into 2021. I know in the past, you’ve noted Redflex and Conduent as competitors that you would come up against every now and again. Maybe you could compare and contrast what they do? Are they even in speed? Or are you competing with them solely in red-light? Who do you come up against? Why do you win? Is it through violation rate? Or is it something else that that drives that maybe on the cost side? Or if you could just unpack that a little more.

Yeah, sure. So when we compete – no, both of those competitors offer the capabilities of new programs like we do. There are other companies as well, smaller companies that operate in the category in photo enforcement. When you win an RFP, it’s going to be a combination of a couple of different things. One is your reputation and your ability to deliver and the ability to have referenceable clients that can say that you do a good job. Two is going to be the efficacy of your technology as well as the price value equation. So I think in general, we have a great reputation with our clients. We deliver really strongly. Our speed cameras are the best – are best-in-class. And so that often wins as well, meaning that we have a higher violation throughput than some of our competitors. And those would be the kind of the standard reasons that we would win.

Got it, super helpful. And on lengths of those contracts, are they typically three years? I’m trying to remember.

They could be three years to five years. It just depends on the municipality. They will often have sort of automatic renewals if the city chooses to use them. So they could be a little bit longer. But three to five years is kind of the average across our portfolio.

Got it, got it. And I know you said that there, a lot of talks have stalled, and you mentioned some renewals, some new wins. Is there – despite that, is there anything in the pipeline that you see coming through, whether it’s in Virginia or Georgia? Or is that largely put off until sometime in 2021?

Yes. There are several RFPs that we’ve responded to primarily in Georgia because that’s a little older than the other. But – so – but again, I think the decision-making in terms of when they’re going to install and/or perhaps complete RFP – the RFP process have been delayed. And again, right now, it’s just not there – it’s not the top of their priority list to finish those off given the challenges that they’re facing in terms of operating schools.

Perfect. No, that’s great. And just one more if I could squeeze it in on the Government segment here. Given the election and all of the stuff that’s happening over the last few days, I just wanted to ask if there’s anything on the ballot. I know a red-light in Miami and Texas has seen some upheaval. I don’t know if there’s anything that’s specifically on the ballot with regards to any of your government programs or if there’s any, call it, flipping of state houses or things that you might have on the radar that could go either in your favor like a speed legislation bill or maybe additional toll roads or something like that or negatively?

Yes. In general, the photo enforcement legislation doesn’t happen during a primary election. It’s going to be usually connected to once a session is in. We haven’t fully embedded the – given that the election was just Tuesday, we haven’t sort of looked at the shift of members in each one, but we don’t anticipate any material changes to our relationships with each of the states with which we work. So we would imagine pretty much steady as she goes.

Got it, got it. And one final one, I know you mentioned something regarding the Hertz relationship and then paying off that receivable. That’s obviously amazing news for you guys. I think I heard you mention that the lag in payment was impacting revenue. Can you unpack that a little bit? Because I would be thinking kind of once you recorded the revenue, meaning once the rental agreement has happened that, that would hit revenues. So I was thinking that would maybe just be a cash movement thing instead of a revenue thing, but I love hear a little more on that.

Yes. No, so there’s nothing that has – is happening with Hertz that’s impacting revenue. So we’ve recorded the revenue. We had pre-petition receivables that were caught up in the bankruptcy. We were able to negotiate a cure through the bankruptcy court on that, where they assumed our contracts, and assuming they have the option to assume or reject contracts during bankruptcy court. And one of ours is the ones that they assumed and they assumed early. And I just think that, that just proves out the value proposition that we have to these large rental car companies. What you may be talking about is that we have a headwind in our net working capital, where we have a large contract, where we’re not currently getting paid due to some administrative hurdles. Once again, that’s not impacting revenue, it’s impacting cash flow.

Great, got it. Thank you for pricing it out. And again, solid quarter, guys. Really appreciate it.

Yes, thank you.

Yes, thank you.

Next, we’ll move to Dan Moore with CJS Securities.

Hey, this is Stefanos Crist calling for Dan. Thank you for taking my question.

Sure.

Yes.

So first, Avis recently reported a very nice earnings, but I also believe they reported a 30% reduction in their fleet. So really, the question is as demand recovers in your experience in prior downturns, how quickly are the RACs willing and able to expand their fleet? And is there typically a lag between a recovery in demand and then the overall fleet?

Yes. Okay, yeah. I mean I think there’s always going to be a lag because I don’t think that they’re going to be overly aggressive to put new cars in until they figured out what the demand curve is. And I certainly wouldn’t say that we’ve been through a cycle that looks anything like COVID-19. But you did see just recently that Hertz even acquired, I think, debtor-in-possession financing related to expand their fleet. So they’re putting their eyes on growth and putting new vehicles in as they also dispose of older ones. So I think it’s going to be a little bit of TBD, but it’s probably – from the time they start to say, OEM, I’d like some more vehicles, it’s probably about a 12-week turnaround.

And they will expand their utilization of their existing fleet first. And then once that utilization hits threshold, they’ll be able to buy and get new fleet to continue to expand.

Got it, thank you. And then one more, if you don’t mind. I believe on the last call, you said you expect volumes to return to pre-COVID levels on a run rate basis exiting 2021. Is that still your expectation? And what gives you that confidence?

Well, as we’ve said, these are definitely moving targets. That’s based upon kind of what we’re seeing now, and it certainly has some asterisks by it, which are the availability of a vaccine, sort of overall adoption of that comfort level and those things would be consistent. So it may – as I said earlier on the call, it could be the end of 2021, but it could also be the first part of 2022. But – so there is some definite flexibility in there.

Yes And I think a lot of those words are really just designed so that people don’t have an idea that it’s a V-shaped recovery that is going to look more like a Nike Swoosh, right. It’s going to take us a while to return.

Yes.

Got it.

Okay. Thanks.

And we’ll move next to Keith Housum with Northcoast Research.

Hi. This is Trevor filling in for Keith. With the European business, could you provide an update on the efforts to expand the tolling business into Spain, Portugal and Italy with the Pagatelia acquisition? And what is the current status there? And how has the COVID pandemic impacted all of that?

Yes. I mean, as we said in the call, a lot of our efforts there have been slowed significantly. The – if you just look currently in Europe, they’re shutting it back down again, in particular, in places like France and the UK, and it’s starting to spread across Europe. So what we said in the call was that it was going to be – it’s slowed everything down. We are still in the process of expanding the frac implementation – excuse me, the RAC implementation side of France as well as we’re continuing to have good dialogue, but we would not anticipate – we’re hoping to sign some agreements that we would do pilots in the early part of next year, preferably Q1, but that’s – so we don’t anticipate any pilots to be launched this year.

Okay, great. And then one last one. With New York City, has Verra been engaged to install any speed zone cameras in 2021? And if so, how many?

Yes. We don’t – we currently don’t have another, what they call, notice to proceed, which you can sort of equate that to a purchase order for the 2021 cameras. I don’t know – our expectation was that we’d have that before we finish the current order we’re working on.

Okay. Great, thanks.

Thank you.

That does conclude our question-and-answer session. At this time, I’ll turn the call back over to our speakers for any final or additional remarks.

I think we’re done.

Yes, I think...

I think we’re done. Thank you.

Thank you, all.

Thanks, everyone.

Well, thank you. That does conclude our conference call for today everyone. Thank you all for your participation. You may now disconnect.